'Difficult' Challenge For Banks

May 28, 2008
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GRAND RAPIDS —  Kevin Kabat, former president and CEO of Fifth Third Bank in Michigan and now president and CEO of Fifth Third Bancorp, came to town last week to give his perspective on the state of the financial industry and to support an organization he said is dear to his heart — Junior Achievement. 

People can’t read a newspaper or turn on the evening news without hearing stories about the credit crunch, rising energy and food prices, and falling consumer confidence and spending. The U.S. economy, while not technically in a recession, is certainly in the grip of a significant slowdown, with most of its key statistics trending south, Kabat said Tuesday at a Junior Achievement-sponsored luncheon at Noto’s restaurant. The first quarter’s estimate of 2.5 percent growth in GDP illustrates that conditions in the country are slowing. Employment is trending higher, the foreclosure rate is climbing, housing prices are down substantially, and inflation is rising on all fronts, from wholesale to retail, he added.

The most significant factor affecting the financial sector has been the U.S. residential real estate market, Kabat noted. A number of areas in the country are experiencing a decline in housing prices of 10 to 40 percent. He said this is the first time that housing prices have deteriorated on a national level in decades — probably since the Great Depression.

Although the Fed lowered short-term interest rates and brought rates down significantly, a lack of confidence in terms of the direction of credit really raised the cost of long-term funding for banks, even for banks with a strong debt rating like Fifth Third, Kabat observed.

“These are challenging times we’re in,” Kabat said. “I’ve been in banking 28 years, and in all those years, I’ve never experienced such a difficult banking environment.”

A number of large financial institutions are suffering from loan losses ranging from hundreds of millions to billions of dollars, including those that didn’t originate or hold subprime loans and never participated in the subprime market, Kabat pointed out. 

“We’re affected by the situation simply because we’re a lending institution with exposure to the housing markets,” he explained. “Investors’ concerns about rising loan defaults and subprime lending has led to significant decreases in the market valuation of virtually every bank today. The housing crisis has been an equal opportunity eraser of shareholder value, whether or not individual companies had exposure to subprime lending and other activities that led to the decline.”

Kabat said Fifth Third, in particular, also was affected directly by geography: It operates in five of the top 10 states with the highest foreclosure rates. The performance of banks and bank stocks have been significantly challenged this year, and the fact that banks are not alone doesn’t make it any less painful, he said.

“As a banker, I appreciate that we work in a cyclical business,” Kabat commented. “Yes, we are in the midst of a difficult credit cycle, but banking is a risk-taking business. A big part of my job as president and CEO is understanding the nature of the cycle and taking the necessary steps to mitigate any negative impact. It’s my job to keep the company focused on growing our core businesses, which is one area that we can control.” 

Fifth Third did successfully grow its core businesses last year, he noted. Fifth outperformed its peers on virtually every key measure of operating performance, which drives long-term value for a banking company, he said. It outgrew its peers in core deposit growth, loan growth, net income interest growth and operating fee income growth.

Kabat said the current housing slump has given Fifth Third an opportunity to show how much it cares about its customers and the community at large. In addition to making some enhancements to its credit approval process, it has also reached out to customers by intervening earlier in problem credit situations, and has actively worked to identify higher risk accounts.

For example, when a customer’s credit file shows potential weakness, the bank makes proactive calling efforts to form cooperative relationships with those customers, Kabat explained. Furthermore, when a loan is in delinquency, Fifth Third works with a customer to understand the reason for the delinquency and the customer’s ability to pay. Doing so enables the bank to modify loans over a short-term horizon, if necessary, to give customers time to regain their footing, Kabat said.

“The bottom line is this: Helping our customers during challenging times helps us to form long-term beneficial relationships with them,” he remarked. “If we’re committed to helping our customers and our community in the worst times, they’ll turn to us in the best times. In a difficult economic environment, efforts must be focused on customers.”

Kabat took a few moments to praise the work of Junior Achievement, an organization that is dedicated to teaching young people about work-force readiness, entrepreneurship, financial literacy and economics through hands-on programs. Kabat’s first experience with JA was 20 years ago, and he said he has been passionate about the organization ever since. He encouraged business people in the audience to become “champions” for Junior Achievement.

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